ELKEM 10% 2018e dividend yield Silicone prices in China continue to slide ahead of Chinese New Year on lower raw material costs, but we expect a moderate pick-up in 2019 on very limited supply growth. We have cut our 2019–2020e EBITDA by 5–7% owing to lower volumes, but we reiterate our BUY and NOK40 target price based on an appealing valuation with a 2018e DPS yield of 10%. The Q4 results are due out at 07:00 CET on 12 February.
Below consensus for Q4. We are 8% below consensus on Q4 EBITDA (we forecast NOK1bn), as we believe we are more conservative on volumes. Our EBITDA represents a 28% decline QOQ on a 41% reduction in Silicone EBITDA and broadly flat elsewhere. We estimate a 2018 DPS of NOK2.4, implying a very strong 10% yield.
DMC prices slightly lower. We understand operating rates have risen in China, but Elkem is still running at lower levels than normal due to weak demand and rising inventories. DMC silicone prices were fairly stable in Q4 despite higher production, but down 8% since late November, essentially following lower input costs protecting producer margins somewhat. In our view, the market is slow due to the approach of Chinese New Year. A lot of speculative capacity announced. In Q4 we picked up on c400kmt of new projects being announced. We understand few of these will ever be completed given the low current price, restricted access to capital, and environmental permits. Capacity additions are often still formally announced to attract attention. Thus, we estimate fairly balanced markets also post 2020 (we still forecast no capacity additions in 2019). Estimate changes. We have lowered our DMC price assumptions for 2019–2020e by 13–15%, owing mostly to lower raw materials costs. However, given our expectations of lower production volumes in Silicone and the curtailment of one oven in Salten, we have cut our 2019–2020e EBITDA by 5–7%. BUY and NOK40 target price reiterated. Our estimates assume only a marginal recovery in DMC prices and Elkem returning to full production. On our estimates, Elkem is trading at a low 2019e EV/EBITDA of 3.7x and P/E of 5.6x.